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TITLE 26-INTERNAL REVENUE CODE for such year provided by subparagraph (A) shall be reduced by % of 1 percentage point for each 1 percentage point of such difference, or (i) 72 percent of the total assets in the case of a mutual savings bank, the appli- cable percentage for such year provided by subparagraph (A) shall be reduced by 1 percentage points for each 1 percent- age point of such difference. If, for the taxable year, the percentage of the assets of such taxpayer which are assets described in section 7701(a)(19)(C) is less than 60 percent (50 percent for a taxable year beginning before 1973 in the case of a mutual savings bank), this paragraph shall not apply. (C) Reduction for amounts referred to in para- graph (i)(A) The amount determined under subpara- graph (A) shall be reduced by that portion of the amount referred to in paragraph (1)(A) for the taxable year (not in excess of 100 percent) which bears the same ratio to such amount as (1) 18 percent (28 percent in the case of mutual savings banks) bears to (ii) the percentage of the assets of the tax- payer for such year which are not assets de- scribed in section 7701(a)(19)(C). (D) Overall limitation on paragraph The amount determined under this para- graph shall not exceed the amount neces- sary to increase the balance at the close of the taxable year of the reserve for losses on qualifying real property loans to 6 percent of such loans outstanding at such time. (E) Computation of taxable income For purposes of this paragraph, taxable income shall be computed- (i) by excluding from gross income any amount included therein by reason of sub- section (e), (ii) without regard to any deduction al- lowable for any addition to the reserve for bad debts, (iiI) by excluding from gross income an amount equal to the net gain for the tax- able year arising from the sale or ex- change of stock of a corporation or of ob- ligations the interest on which is exclud- able from gross income under section 103, (v) by excluding from gross income an amount equal to the lesser of % of the net long-term capital gain for the taxable year or % of the net long-term capital gain for the taxable year from the sale or exchange of property other than property described in clause (iII), and (v) by excluding from gross income divi- dends with respect to which a deduction is allowable by part VIII of subchapter B, reduced by an amount equal to the appli- cable percentage (determined under sub- paragraphs (A) and (B)) of the dividends received deduction (determined without regard to section 596) for the taxable year. (3) Percentage method The amount determined under this para- graph to be a reasonable addition to the re- serve for losses on qualifying real property loans shall be computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2), reduced by the amount re- ferred to in paragraph (1)(A) for the taxable year. (4) Experience method The amount determined under this para- graph for the taxable year shall be computed in the same manner as is provided with re- spect to additions to the reserves for losses on loans of banks under section 585(b)(3). (5) Determination of reserve for percentage method For purposes of paragraph (3), the amount deemed to be the balance of the reserve for losses on loans at the beginning of the tax- able year shall be the total of the balances at such time of the reserve for losses on nonqua- lifying loans, the reserve for losses on qualify- ing real property loans, and the supplemental reserve for losses on loans. (c) Treatment of reserve for bad debts (I) Establishment of reserves Each taxpayer described in subsection (a) which uses the reserve method of accounting for bad debts shall establish and maintain a reserve for losses on qualifying real property loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. For purposes of this title, such re- serves shall be treated as reserves for bad debts, but no deduction shall be allowed for any addition to the supplemental reserve for losses on loans. (2) Certain pre-1963 reserves Notwithstanding the second sentence of paragraph (1), any amount allocated pursu- ant to paragraph (5) (as in effect immediately before the enactment of the Tax Reform Act of 1976) during a taxable year beginning before January 1, 1977, to the reserve for losses on qualifying real property loans out of the surplus, undivided profits, and bad debt reserves (determined as of December 31, 1962) attributable to the period before the first tax- able year beginning after December 31, 1951, bhall not be treated as a reserve for bad debts for any purpose other than determining the amount referred to in subsection (b)(1)(B), and for such purpose such amount shall be treated as remaining in such reserve. (3) Charging of bad debts to reserves Any debt becoming worthless or partially worthless in respect of a qualifying real prop- erty loan shall be charged to the reserve for losses on such loans, and any debt becoming worthless or partially worthless in respect of a nonqualifying loan shall be charged to the reserve for losses on nonqualifying loans; except that any such debt may, at the elec- tion of the taxpayer, be charged in whole or in part to the supplemental reserve for losses on loans. §593 Page 436